Speculation from a NYC venture capitalist

Tag Archives: online advertising

Been listening to a lot of the chatter about the group buying bonanza that is going on these days. The latest news is a rumored large round for Groupon at a reported $1.2B valuation, close on the heels of a $25MM round announced by LivingSocial, which was shortly after Buywithme.com completed their $5.5MM round. The count is now more than 70+ group buying companies that have launched, with more coming each day. In addition, many content publishers are now beginning to think about entering the space. Is this insanity?

My simple answer: No.

I think the dynamics of group buying are very different than people think. In fact, I don’t like to call it group buying. I also think it has very little to do with retail merchandising. Instead, I put it in the category of perfected local performance advertising.

People have talked for many years that the local market is the holy grail for the next stage of online ad spend. The problem is how to convince the corner pizza shop or spa to value a “click” and spend money on this thing called “Google”. These merchants are way too busy in their day to day and have none of the time we have to study TechCrunch or Read/Write/Web to follow all the twisted ways we have come up with to advertise online. The companies that have become successful in local advertising have had to solve that problem in some form or fashion. ReachLocal kicked this off by creating a large overlay sales force to go in, talk to these local merchants, and deliver “in person” translation. Companies like Yext have skyrocketed by translating online advertising into the currency of the local merchant. “Have a gym? We’ll book you appointments.” Monetization at Yelp and OpenTable are related to things restaurants have done for decades – reviews & reservations. One clear takeaway – make something simple and transaction oriented, and local merchants will pay attention.

Coming back to “group buying”. What is group buying? Well, it’s a way for a merchant to give up some margin (aka, advertising dollars) to secure a purchase and hopefully build some incidental brand goodwill. In this case, activation by sufficient buyers and selling out are simply the game mechanic. If you’ve used any one of these sites, the offer almost always gets activated and many times sells out. The group buying craze is really a merchant paying some money for the best possible performance advertising you can have – A CLOSED SALE! (Not to mention some “in person CPM” thrown in for side benefit).

And now back to Groupon, et al? Well, their model is optimized around a tight, high volume operation versus a costly field sales approach. Over time, Groupon is building a database of every local merchant out there, and also a database of who has bought what in a local area. They’ve proven their ability to execute in 30+ markets and now will just manufacture the same city widgets 100 times over. As they are more successful, they can automate greater pieces of the system. Word of mouth begins to kick in. Data synergies such as re-marketing and recommendations become possible. Is that worth $1.2B today? I have no idea. But I do know local is big. Hundreds of billions of dollars big.

What happens to all the other companies out there? The big venture outcome game is probably over with the leaders already staking out their position. Other large local content players will get into the mix. But local has a few dynamics other segments don’t have. First, scale is less relevant than in other industries – a merchant can only service so many of the offers, and the offers are inherently relevant to the people in a neighborhood. Particularly since most offers are services like a massage or spa. Second, to create good ‘rotation’, the Groupons of the world limit how many times a merchant can run a deal and the number of deals shown. If this perfected local performance advertising works for a merchant, they will gladly go to the next guy and see if it works on LivingSocial‘s members, and after them, to the next person, and so on. Most scale businesses invite more of an activity, not restrict it. Third, relationships can matter. Small players can get to their local merchants and use charm to rope them in. So while many are highly skeptical, I believe there will be a slew of companies that exist in this market and can grow profitably for the next few years. Many should never take venture capital. But there is a long way to go to activate this market!

[Update: Space is really moving. BuyWithMe Inc. announced that Cheryl Rosner, former president and chief executive of Ticketmaster company TicketsNow, is its new CEO.]

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I did a post a few days ago around the high level themes from our Online Marketing Summit called “Stop Selling, Start Giving”. There were enough very practical tactics that emerged from the event that I thought I would share some below.

SEO:

The best time to think about SEO is when building a new site. When using any good CMS system, such as Drupal or Joomla, be sure to use their SEO plug-in modules. It will make it very tough to not have SEO on the site.

Links are very important, particularly ratio of inbound links to outbound links. Also, the deeper and more specific you can have links to the site (rather than just all to the homepage) that will improve the SEO of the site and pages. Make sure your content is structured in such a way that incents people to point to deeper pages.

SEO is a process involving content creation, engineering head count, links, technology, and budget. Create commitment to SEO in the organization. Hiring one person cannot change an organization or generate real SEO value. Consider allocating 10% of engineering time to SEO work. The best practitioners have everyone in the organization focused and thinking about it.

Before you spend your budget on an SEM campaign, be sure to take 10% of it FIRST and do a test run. You can save yourself some major embarassment in case something was not set right and to further tweak.

Be very careful using BroadMatch – you could spend money in a heartbeat on terms that are not related to your product or service.

Keyword research is critical. Lots of tools out there can help, but also thinking about negative keywords, plural vs singular, etc, are all ways to create variation.

Create a community and empower it to set directions – a censored community is not one at all. Manage but “with a light touch”. Allow users to moderate content.

Recognition is key for community growth – tiered structures, badges, experts, rewards (virtual or physical) are great ways to accomplish this.

Transparency is critical – if you have an issue, publicly engage the community and tell them what is going on. Building trust is paramount to a vibrant community.

Measure the community – post activities, engagement, session lengths, etc. The numbers will tell you if your community is active and thriving. If it’s not working, find out why! It’s usually something you did.

Email

Email is NOT for acquisition, it is for retention!

The FROM and SUBJECT alone determine if someone opens – the questions they are asking are “DO I KNOW YOU?” AND “DO I CARE?” respectively. Answer those questions well.

Build your lists organically by providing VALUE to users such that they want the information rather than a marketing message. Use things like questions that your customer service receives as material for future newsletters. You dont need dozens of articles – a few targeted ones that serve a purpose and give value to customers is better.

Create links back to specific pages on your site so you can track activity and users interests.

Make sure you have a sign-up form on ALL pages of your site. Customize the thank you note when someone does sign up – show genuine appreciation for signing up.

Most people have images off in their email clients – dont have a huge picture at the top or users will see a big X instead of a message in their preview screen.

Testing is key – treat email just like PPC.

Use the word “Feedback” instead of “Survey” – people are much more willing to provide feedback than take a survey. One improves their life, another takes time from their life.

Marketing Automation

If you can read the “Digital Body Language” of how customers are interacting with your site, content, and marketing activities, you can calculate how likely they are to buy and where they are in sales cycle.

Lead scoring is critical to understand when marketing activities transition to sales type of activities.

Separating FIT of buyer from ENGAGEMENT of a user is critical. A key decision maker doing a few things online and a summer intern doing a lot online should not have the same lead score. A CEO doing A LOT is the ideal. Segment those rigidly and pass on to sales things at the closest intersection to improve MQL close rates.

Integrated Marketing Approach – Case Study of Omniture

Marketing commits to generating 35-80% of sales accepted leads, and in closing 35-40% of deals in a quarter. If you do not know what number you are responsible for, you are not strategic.

Dont do live webinars – record and push it out there – allow your customers to sign on when they can, fast forward to what they want, and interact as they wish.

It’s hard to find online marketing savvy folks. If you cant find someone smart, hire an inexperienced, smart person and send him/her to get certifications: DMA, AdWords, etc. Make sure they have gone through the formal trainings – well worth the investment, and smart people without legacy biases will get this system.

Map your marketing process to a sales process – someone looking deep on product page is much further in a funnel than someone downloading whitepapers. Know that and automate.

John Deighton’s definition of Interactive Marketing: “The ability to address the customer, remember what the customer says and address the customer again in a way that illustrates that we remember what the customer has told us.”

I moderated a panel this past week at the AlwaysOn OnMedia conference in NYC.It was an opportunity to get behind what the “big media” folks are thinking in this economy, and how they interact with startups.The panelists were Jessica Schell, SVP, NBC Universal; Walker Jacobs, SVP at Turner Digital; Vivek Shah, Group President Digital, Time; Jim Spanfeller, President, Forbes.com; and Sanjaya Krishna, Principal & US Digital Services Leader, KPMG. Below are the most interesting takeaways I got from the session.For the full panel, click here.

·On the overall economy, as expected most of the panelists indicated it was tough going out there, and they were focused on partnerships that drove revenue.In fact, given the pressures in the broader market, they were “more open than ever” to partner.Some of the panelists highlighted their willingness to do deals in areas like content as evidence of that openness.

·One of the key challenges they saw in unlocking more digital dollars was translating brand advertising into value online.One of the more interesting ideas was from Vivek Shah, who said that while growth in performance based advertising in a recession is to be expected (as demonstrated by the most recent Google and Yahoo quarterly results), it is akin to harvesting crops.It’s easy to pull in more food near term by harvesting more (search) but if you don’t plant any seeds (brand advertising), you may find yourself without crops in the future.

·All the panelists want to find ways to drive additional lift and yield – the “optimization” problem has still not been solved.Each were working with various contextual, behavioral, and other techniques to try and improve CPMs and deliver a more compelling story for this medium versus other areas of spend to advertisers. There were a few areas of strength highlighted, including in QSRs (quick service restaurants) and entertainment, to go along the usual weak spots of finance and autos.

·In defense of traditional media, the panelists pointed out that people turned first to CNN when news of the airplane landing in the Hudson River broke, not the blogosphere.The panel expressed a need for better curation tools.

·There was lots of discussion around the dearth or plethora of data online, and the need to make better sense of it all.Data standardization continues to be a recurring theme.

·Time Warner and NBCU both highlighted their investment arms (Time Warner Investments and Peacock Equity Fund) as one way to get introduced and a way for them to learn about startups, but quickly pointed out that the best way was to get a direct operational relationship.An investment did not guarantee a deal, and a deal did not guarantee an investment.

·In terms of mistakes startups make when engaging with big media, the panel offered the following advice:1) don’t present a deal that assumes you’d capture the lion share of the economics out of the gate; 2) set expectations appropriately – start small and prove success rather than promising the moon; 3) focus on how to drive revenues in this environment; 4) know what items they are willing to outsource and what items they would never (such as the sales relationship).

·I concluded asking the panel what company they would start knowing the problems they currently faced in their environments.The answers:a next generation data exchange, improving the mobile experience, new back office systems designed for the digital era, improving operational efficiencies.

It was a fun panel to moderate.The panel cited numerous examples of startups they have successfully partnered with to drive mutual value, but it was clear there was a long way to go.Those of us part of the startup ecosystem should take heart!

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As many of you know, Ad-Tech is in NYC this week.It’s a great conference that brings together some of the leading traditional and digital thinkers to explore the latest topics affecting the industry.The timing of this Ad-Tech was particularly interesting given the broader market environment.

I had the pleasure of being on a panel entitled “The Digital Economy” with David Moore of 24/7, Bob Raciti of GE, Imran Khan of JP Morgan Chase, and moderated by Henry Blodget.Much of the discussion focused on the state of the online advertising market.I thought I’d share some of my predictions:

·2009 will mark a very, very tough year for overall advertising, and I would not be surprised if the total ad market (which exceeds $230 billion) declines by 10% or more.Mary Meeker had put out an interesting analysis that showed the correlation between GDP and advertising spend at 81%.Based on that analysis, at a 0% GDP growth rate, one would see a 4% decline in overall advertising.With a 2% contraction in GDP, one would expect to see 8% decline in advertising.I believe 10% is a real possibility.

·There will be a continuing rotation of dollars from legacy advertising markets to online advertising.The overall online advertising market (which is only $25 billion out of that $230 billion pie) will grow, though at much more muted levels than the 15%+ currently predicted by the market. More likely is mid single digits overall. History shows that advertising eventually follows the user, and given how woefully behind ad dollars are to the time spent online, growth should be expected.This will be offset by declines in the unit pricing, both on a CPM and CPC/A basis.Clicks or actions won’t matter if the consumer cannot ultimately convert because they don’t have the money.

·We will not see the 25% drop that we saw between 2001 -2003, for two reasons:1) Overinflated tech startups are not buying from other overinflated startups.Online is mainstream and touches nearly every industry in a meaningful way.2)The inventory being offered has evolved from display only many years back to display, search, SEO, email, lead generation, affiliate, etc.

·This contraction could put MAJOR pressure on the traditional media players.In particular, I worry about the newspapers, who still generate over $38 billion in advertising, with content that is often readily available from hundreds of sources, including blogs of which many are viewed as more “authentic” to young readers.I think we can see some major failures over the next few years.Those who produce premium content, or content that has a high cost of production, controlled distribution, and long shelf life (eg the networks, film studios, etc) will have to work through their transitional issues and the current tough environment but will survive and thrive online.

·Within online advertising, consistent with prior recessions, we will see retrenchment to direct response/performance oriented spending.Search will grow much faster than display, as people will release dollars only to the extent they are certain they will see them back very shortly.

·Other areas of robust growth will include online video and in gaming advertising, as people increase time on leisure entertainment.Online video will get even more compelling as we get beyond the pre-roll only.There is such a rich opportunity to make advertising within a video context so much more engaging and real-time.You can engage the users with calls to action, can make real time “hot lead” phone connections, can offer incentives to induce immediate behavior. We should watch for some exciting innovations.

We are still early in many aspects of the online revolution.One of my companies, Conductor, just released a report that showed over 75% of the Fortune 500 have no presence for their keywords and brands in the natural search domain.Consistency of measurement has continued to prove a challenge to unlocking more spend. We have plenty of data, just no good idea how to agree on it. Increasing fragmentation in the sources of online spend in a market where people had enough to do with just TV and newspapers will require much more robust technology for automation.The whole concept of de-portalization and free flowing content will necessitate a re-writing of all of our Web 1.0 and 2.0 tools.There is still a lot more innovation needed to move the rest of the $200 billion or so that is not yet online, and so while the short term market looks tough, the long term opportunities remain exciting.